Rankings of state “business climate” are misleading, fall short of actual measures

Note: I had the opportunity to see Dr. Peter Fisher present on state business climate rankings at the recent Minnesota Policy Conference. We asked him to summarize his findings in this guest blog.

Minnesota has the third best business climate in the U.S. Or maybe it has the third worst, or somewhere in the middle. It all depends on which ranking you believe.

So which one should you believe? The short answer is, probably none of them. Any ranking that claims to have come up with a single metric that represents the overall state “climate” for businesses considering setting up shop in Minnesota is suspect.

That includes the Tax Foundation, which just released their 2018 State Business Tax Climate Index, which put Minnesota at 46th – only four states worse. It includes the ALEC-Laffer report, Rich States, Poor States, which invents an “Economic Outlook Ranking” that places Minnesota 45th, and the Small Business and Entrepreneurship Council’s Small Business Policy Index, where Minnesota is 47th.

The basic problem with these rankings is that they are not based on research or evidence of which factors contribute how much to a state’s prospects for economic growth or its attractiveness for new business investment. And all three of those just cited base most or all of their ranking on various measures of taxes; the rankings are designed to promote the anti-tax, anti-government agenda of the organization producing the ranking.

The proof is in the pudding, as they say. Does recent state performance support the claims by these organizations that their index provides a recipe for state growth and prosperity? No. States that did better on the Economic Outlook Ranking have not grown any faster in subsequent years than states that did poorly, and the states with the best rank actually have lower incomes and higher poverty rates than the states with a low rank. The states scoring highly on the Small Business Policy Index have done no better on a variety of measures of entrepreneurial activity and small business growth than states scoring poorly.

There are rankings that are much broader, taking into account the quality of the state’s workforce, the cost of living, quality of life measures, education and infrastructure investments, and other factors that can matter to businesses and to the workers they hope to attract. On these indexes, Minnesota ranks much higher – as high is third by CNBC’s Top States for Business, and 15th by Forbes’ Best States for Business.

It is tempting, if you are a Minnesotan proud of your state’s investments in public services and the quality of life your state offers, to decide that these rankings are the ones to pay attention to. But here’s the rub. While the individual measures that go into the rankings – average education level of the workforce, for example – do provide useful information, the overall index is still suspect. That’s because dozens of disparate measures are weighted arbitrarily and mashed together into a single index number that has no real science behind it.

My advice? Yes, pay attention to how your state is performing on particular measures – growth in wages, incomes, education levels of the workforce, environmental quality. Look at real research on the benefits and costs of programs like job training or child care assistance or infrastructure. But forget about these rankings of a mythical “business climate” that are driven by the desire either to promote an agenda, or sell magazines.

Guest blog by Peter Fisher, Research Director of the Iowa Policy Project and Professor Emeritus of Urban and Regional Planning at the University of Iowa. For a more detailed critique of these rankings, visit his website: Grading the States: Business Climate Rankings and the Real Path to Prosperity

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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